Blame Keynesianism

I love articles that do a great job of explaining at a high level current events or current workings on the economy. Today, there is definitely a good one. Peter Foster at the Financial Post has a great article called Keynesian Contagion.

Stock markets went briefly into free fall yesterday due to fears of Greek “contagion,” but neither the fecklessness and mendacity of the Greek government nor the unworkability of the European currency system are the real culprits. The heart of the problem is the unsustainability of the massive debts taken on by subprime governments to bail out banks and fund “stimulus” packages.

Blame it on Keynesianism.

Yes, we’d like to blame a fat fingered trader or a computer malfunction, but Foster hits the nail on the head here. The root cause of the recession and the massive instability that we witnessed yesterday are the failed Keynesian policies of the global economy, including the United States.

Look at the following amazing summation of the global economy by Foster:

The even bigger issue is whether the gigantic Ponzi scheme that passes for economic policy in most democratic countries — and that is overseen by the even greater fantasies of comprehensive regulation and control by the EU, G20, or IMF — is finally imploding, with inevitably grim consequences.

One can certainly sympathize with ordinary Greeks, who have been kept poor by terminally corrupt and incompetent government and public-sector predation. Greek Communists are calling for an “uprising,” but against what? Economic reality? Then again, a revolt against economic reality is certainly one definition of Keynesianism. Indeed, Greek public-sector and union arsonists are in many ways merely John Maynard’s children, responding to the sheer injustice of demands for austerity. Keynes preached that it was unfair to ask workers to restrain themselves. Better to try to fool everybody and secure full employment with government spending and inflation.

Again. Unbelievable. The last sentence there is amazing. It’s better policy to attempt to fool everyone with “full employment” combined with government spending and inflation. Sure we might have full employment, but everyone will be getting poorer, especially the dilligent savers. Ever wonder why Americans HAVE to be fully invested in risk assets like stocks for any chance at retirement? There’s your answer.

Foster goes on:

How, Greeks might well ask, after the so-recent spend-yourself-rich wisdom of the G20, can the IMF now demand cutbacks? Austerity — in the Keynesian world — is as ridiculous as thrift. What counts is spending. What is needed for Greek recovery is to boost public-sector wages. Greeks just need to consume more. Also, the government needs to spend more. Perhaps pull down the Acropolis and rebuild it. Or maybe twin it. Think of the “multiplier.”

Austerity plus Keynesian economic policies simply don’t work. In order for the “system” to continue in the Keynesian world, you need constant “growth” or expansion. This is usually made by spending and inflation. Not austerity.

When one looks at the history of international finance, the number of times governments have defaulted, or threatened default, is stunning. You would think it would persuade banks to be more careful about sovereign lending. The reason they aren’t is that they know governments have their citizens on the hook. And if that fails the “international community” can bail them out.

You can be assured that Greece isn’t the only nation in trouble. The record speaks for itself. We’re living in interesting times.

I think you are presenting a strawman version of Keynes' ideas. His idea was to use fiscal policy (government spending) to smooth out the impact of the business cycle (expansion/recession). When you are in a recession government should spend more to prevent cyclical unemployment. However, you're missing a crucial part of what he said: namely that during an expansion the government should raise taxes to pay off the deficit that was incurred during the recession. And in practice this is the sticky part. The deficit does not get paid of because it is often politically unpopular to do so during the good times. I think the problem is that Keynesiani economic policy is often implemented improperly not that it isn't theoretically sound (i.e. a Ponzi scheme).

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